How many mortgage rate cuts does it take to spark a price war?
Making sense of the latest trends in property and economics from around the globe.
6 minutes to read
To receive this regular update straight to your inbox every Monday, Wednesday and Friday, subscribe here.
Halifax, HSBC, Nationwide and TSB have all cut mortgage rates in the past 48 hours as the lenders try to make up ground lost earlier in the year.
Reductions should have further to run, provided we see more positive inflation figures next week. The term 'price war' has already made its way into headlines, which will help underpin an improvement in housing market sentiment through the second half of the year.
Mortgage rates will eventually find a new level as the Bank of England's hiking cycle ends, which at this rate should happen this side of Christmas. That level will be higher than borrowers are used to. Consultancy Capital Economics thinks the average mortgage rate will remain around 5.7% until mid-2024, before easing to 4% by the end of 2025.
Trouble for tenants
Housing market activity continues to ebb, according to the July RICS Residential Market Survey. The net balance of new buyer enquiries, for which a reading below zero signals a monthly contraction, came in at -45%. The metric of agreed sales registered -44%, which is the weakest reading since the early days of the pandemic.
While the data suggests the market is on track for further price falls, we think values will end the calendar year down about -5%, so about 8% below their 2022 peak. Demand should prove more resilient than expected given the shock-absorber effect of strong wage growth, lockdown savings, the availability of longer mortgage terms, flexibility from lenders and the popularity of fixed-rate deals in recent years, Tom Bill told the Times earlier this week.
The RICS survey came with more dismal news for tenants. A net balance of +54% of surveyors reported an increase in demand from tenants over the course of the month, which caps the strongest quarterly pick up in rental demand since the beginning of 2022. Meanwhile supply still looks to be contracting. New landlord instructions registered a net balance of -30%, down from -24% last month. A net balance of +63% of respondents expect rental prices to increase over the coming three months.
The supply crunch
The subdued sales market, the end of Help to Buy and an unpredictable planning system all present challenges for the housebuilders.
Persimmon and Bellway reported results this week and offered insights as to the scale of the looming supply crunch for new homes. Persimmon delivered 4,249 homes in the first half, down from 6,652 a year earlier. Bellway delivered 10,945 homes during the full year to the end of July, down from 11,198 a year earlier. Planning consents across the industry are running about 20% below the pre-Covid-19 average.
This isn't just a housebuilding issue. Living sector developers are also struggling with the cost of debt and have their own unique struggles with the planning system.
There's a lot going on behind the scenes as developers seek to position themselves for the next economic cycle. To get an insider's view, Anna Ward spoke to Charlie Dugdale, Knight Frank's head of development partnerships, and Katie O'Neill, an associate in our living investment research team.
They discuss how the economic slowdown is impacting the absorption rate, how master developers are seeking a greater diversity in the type of housing being built, and the rise of partnerships between housebuilders and living operators. Listen here, or wherever you get your podcasts.
Spatial parameters
The degree to which knowledge workers could get things done from a kitchen table was among the many surprises of the pandemic.
The latest research from Stanford University suggests output suffers about 10% to 20% when employees work remotely, which won't be welcomed by bosses but it's hardly a disaster under conditions of necessity. The success of remote work opened up the possibility that employers could access talent from anywhere, regardless of where they were based:
"If you can do your job from anywhere, someone anywhere can do your job," the FT's Simon Kuper wrote in March 2021. "Lesser-skilled workers in western countries have been through this already, when jobs in factories, call centres and back offices were offshored. Parisian graphic designers and New York bankers may be about to find out what that feels like."
While that looked possible at the time, it isn't playing out that way - at least not in the tech sector in which it looked most likely. Zoom's decision to enforce office working - see Wednesday's note - generated a lot of interest, so I asked Knight Frank's head of occupier research Lee Elliott whether he thought it moved the debate on workstyles forward, and one of several points he made related to spatial parameters - Zoom's policy applied to those at a “commutable distance” – within 50 miles of the office:
"It's further evidence that the fully remote model many in the tech sector advocated in the early months of the pandemic is under pressure," Lee told me. "Another example is Meta, who argued during the pandemic that a fully remote model enabled access to global talent pools and that hiring managers promoted non-specified location roles (i.e., totally remote)... new roles are now required to be within an 80-minute commute of Meta offices."
Workplace tensions
Lee likens the current trend to a workplace pendulum that is swinging back towards a more office-centric position - either office-first or office-only. The process is generating tension between employer and employee, who are often unwilling to let go of the benefits that remote work provides.
Businesses are all different, so must adopt a workstyle that works for them, but without losing staff to competitors pursuing different strategies. The employees within businesses also have differing abilities to work remotely effectively, which is a recipe for yet more tension.
Business leaders view the office as part of the solution, which is driving demand for buildings that have enough amenities and collaborative space to be a destination. These spaces are few and far between relative to the demand from occupiers, which is why rents are climbing in the best locations despite the uncertain economic outlook - it's a small cost if it helps resolve these difficult issues.
Anyway, Derwent delivered an update on the second half of its financial year yesterday and reported £26m of new leases in 2023 so far, a near record level, at an 8.3% premium to December 2022 Estimated Rental Values (ERV).
"Occupiers want good, green, net-zero carbon buildings...They also want them to be amenity-rich and in good locations . . . and they’re happy to pay very good rents for that," Derwent chief executive Paul Williams told the Times. “Rents are good value, representing less than 10% of occupiers’ outgoings.”
In other news...
Defra releases biodiversity statutory credit prices. Mark Topliff has the details.
Elsewhere - Bank of England rate rises push mortgage costs up by a fifth (Telegraph), race to refit Britain’s rented homes loses momentum (FT), Amazon tracks and targets US staff over failure to work 3 days in office (FT), UK cost of living crisis set to ease for the first time in two years (Bloomberg) and finally, another positive US inflation reading (Bloomberg).
Photo by RDNE Stock project